Stop losses let you hold onto your winning trades for longer without taking on extra risk.
ByDarry Port
Updated Jan 19, 2022
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Crypto
Stock Trading
Extra Income
No matter how you slice it, investing in crypto is risky. Prices are volatile, regulations are uncertain and hacks are not uncommon.
With the right tools, though, you can drastically lower your risk. For a HODLer, that could mean using an external wallet. But as a trader, your #1 risk management tool is the stop loss.
Let me explain. So, there are a bunch of people out there who bought their first crypto in September of last year, right? I’m sure they were all patting themselves on the back when BTC’s price shot up to $67K, too.
Unfortunately, all of those gains were erased in the following weeks as the market came crashing down. Back to square one—unless you were crafty enough to set a stop loss.
So if you want to start trading like the pros and lock-in more of your crypto gains, keep reading.
What is a stop loss?
Much like a trapeze artist uses a safety net, traders use stop losses to keep from crashing and burning once their portfolios are up.
More specifically, a stop loss is a trading tool that automatically closes your position once the price dips below a certain point. The exact price at which you sell, also known as the stop price, is something you set based on your risk appetite.
On the one hand, this prevents you from making bigger gains if the price recovers. But on the other hand, it also stops you from losing your existing profits if the price keeps falling.
When should you use a stop loss?
Unless you’re the gambling type who likes putting everything on the line when you’re already on a roll, you should always set stop losses on your trades.
But to get a bit more nitty gritty, here are the situations in which you’d benefit the most from using a stop loss:
You’re a beginner.
You wouldn’t want your first experience in crypto trading to be a disaster, right? Stop losses should help newbies minimize mistakes while they’re still learning the ropes.
You’re taking a big risk.
The potential for high rewards is always coupled with high risk. So there’s no shame in selling early to protect your capital. Better that than riding a downtrend all the way to the bottom.
You’re not trading full-time.
Most people don’t have the time to monitor their trading positions all day and manually execute orders. If this is you, then price alerts and stop losses are your two best friends.
How to set a stop loss in crypto trading
While setting a stop loss is simple, you need to know exactly what you’re doing. Because once it’s set, the tool will be able to execute trades on your behalf. Here’s what the process looks like.
1. Identify your threshold
The first step here is knowing your limits. For any given trade, you should ask yourself:
- How much do I expect to make?
- How much am I willing to lose?
You can answer both these questions in terms of percentages, monetary amounts or target prices.
2. Select the stop loss type
Stop losses come in different flavors, each of which has a valid use case. Here are the most common types you should familiarize yourself with.
Full stop loss
This triggers the crypto exchange to liquidate your entire position once a particular price is reached. So you may lose out on more gains, but at least your losses are capped too.
Partial stop loss
Unlike the first stop loss type, this one allows you to customize the amount that you’d like to sell. So when a price drop happens, you keep some money in the trade.
Trailing stop loss
This one’s a bit more complicated. While the first two stop loss types close your position at a fixed price, a trailing stop is more flexible.
Let’s illustrate this with an example. To set a trailing stop loss, you choose the maximum percentage of loss you’re willing to incur. In this scenario, the price of BTC is $41K and you set a trailing stop loss of -5%.
In other words, the tool will trigger a sell order if BTC reaches $39K. But if BTC’s price rises to $42K, then the trailing stop loss will move up. Now the tool will only trigger a sell order if BTC dips to $40K. Neat, right?
3. Monitor your stop loss
There’s one more thing you should keep in mind about the stop loss function. It isn’t a magic pill that always protects you against losses. Crypto is super volatile, which means there's a very real possibility that your stop loss fails.
While the sell-order itself will execute, your order could be filled at a lower market price if the asset’s value is crashing hard. In that regard, stop losses aren’t a 100% “set it and forget it” trading tool.
The best defense against this is to stay on top of daily market moves. And if you feel like the tides are turning, don’t hesitate to step in and pull the plug.
Are you a believer?
HODLer or in it for the profits?
Which crypto exchanges have stop loss?
There are over 450 crypto exchanges out there to pick from. But given how essential the stop loss function is, you should choose one that supports this feature. Here’s a short list of popular crypto exchanges that have stop loss:
eToro
For traditional investors who are looking to dip their toes in crypto, eToro is one of the first options that come to mind. Unlike the other exchanges on this list, eToro is an all-in-one platform where you can hold stocks and commodities in addition to cryptocurrencies.
To set up a stop loss on eToro:
- Go to the relevant trade in your portfolio.
- Click on Edit Trade > Stop Loss.
- Set a stop price or the monetary amount.
- Click on Update to save your settings.
eToro
Crypto
Coinbase
Coinbase is the largest crypto exchange in the US, known for its reliability and ease of use. On Coinbase, stop losses are labeled as “stop limit orders." To place a stop limit order:
- Select STOP on the Orders Form.
- Choose Sell.
- Specify the Amount and Stop Price.
- Specify the Limit Price, which is the minimum price you want your order to be filled at.
Coinbase
4.3
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Crypto
Protect your gains at all costs
A stop loss has many benefits. For one, it’s designed to minimize your risk. In the unfortunate case that a crash occurs, you’ll be able to salvage some, if not all of your capital.
Secondly, it makes your life easier by removing the need for you to monitor price action all day. Once the market price reaches your stop price, then the stop loss will immediately trigger a sell order at the best available price.
So whether you’re a newbie or advanced trader, you should be utilizing stop losses to their full potential. Lower risk, secured profit, less manual trading. What more could you want?
